Corporate sector on solid ground entering 2025

One of the key reasons we see credit continuing to outperform government bonds over the medium term is corporate fundamentals.

Everyone knows corporate bond spreads are tight, and we expect they will experience some volatility over the next 12 months. However, if the macro outlook remains reasonable (i.e. there’s no recession) and corporate finances remain in good health, then we see no clear reason for a sell-off to gain too much momentum.

Rating agencies are a useful barometer when it comes to tracking credit quality. While they are by no means in a better position to assess credit quality than any other market participant, their various sector reports and outlooks can be valuable for identifying trends in key metrics. For example, of the 17 different industries rated by Moody’s in its non-financial corporates outlook for 2025, only one – the auto industry – is currently on a negative outlook. Five have a positive outlook with the remaining 11 judged to be stable. It is a similar story by geography, with the Moody’s outlook for non-financial firms in North America, EMEA, China, Asia Pacific and Latin America all stable.

Compared to this time last year, Moody’s has fewer industries on negative, more on positive and roughly the same on stable. The only industry that ended 2024 with a worse outlook than the previous year was the airline sector, which was downgraded from positive to stable. In terms of geography, EMEA, China and Latin America are all rated stable now having been on negative outlook 12 months ago. Looking at rising stars and fallen angels – companies being upgraded from high yield to investment grade and vice versa – shows a similar picture. In all regions bar China, there were more rising stars in 2024 than in 2023. The fallen angels comparison is a bit more even, with fewer of them in North America and Asia Pacific in 2024 versus 2023, but marginally more in EMEA, China and Latin America.

Finally, looking at the ratings of individual corporates last year, there were more upgrades than downgrades in Western Europe, Eastern Europe, North America, South America, Africa and the Middle East, and parts of Asia. The main underperformer was China, which continues to see far more downgrades than upgrades, a trend that has been in place since 2020. Even in Germany, with all the negativity around the structural challenges the country is facing, there were 1.58 corporate upgrades for every downgrade in 2024.

These trends support our own view of credit fundamentals. Companies are generally speaking in good health, with leverage and interest coverage ratios that do not seem stretched on average.

As always, averages hide some wrongdoers that are moving in the opposite direction. But with yields as high as they are, there is little need to go fishing in those ponds. In our view, fixed income investors can still obtain a handsome real rate of return this year by sticking to credits that are in good shape.